Public Information Notices (PINs) are issued, (i) at the request of a member country, following the conclusion of the Article IV consultation for countries seeking to make known the views of the IMF to the public. This action is intended to strengthen IMF surveillance over the economic policies of member countries by increasing the transparency of the IMF's assessment of these policies; and (ii) following policy discussions in the Executive Board at the decision of the Board.

The IMF Executive Board on March 6, 1998 concluded the 1997 Article IV consultation1 with Morocco.

Background

Morocco’s economic growth in the 1990s has been dampened by recurring droughts,
and annual growth of the nonagricultural sector declined from 3.9 percent in 1979–90 to
2.8 percent in 1991–97. Following a record cereal crop leading to a 12 percent increase in
real GDP in 1996, agricultural output suffered from adverse weather conditions in 1997 and total
GDP contracted by 2.2 percent even though nonagricultural sectors expanded by about 3 percent.
While unemployment declined in 1997, it still remains high at 16.6 percent.

Tight demand management contributed to reducing inflation further, from 3 percent in 1996
to 1 percent in 1997, consistent with maintaining a nominal exchange rate anchor. Interest rates
declined with the rate on one-year treasury bills falling from 9 percent to 7 ½ percent. The
stock market rose by 48 percent in 1997, largely unaffected by the recent turbulence in Asia.
Privatization was a major success in 1997 (1.4 percent of GDP in receipts) and foreign direct
investment exceeded expectations (3.5 percent of GDP).

In the fiscal year 1996/97 (July-June), the central government overall deficit (excluding
privatization receipts) was reduced to 3.2 percent of GDP. Revenues reached 24.8 percent of
GDP, substantially exceeding the objectives of the budget. Expenditure levels were lower than
budgeted, reflecting lower capital outlays, interest payments and other nonwage current spending.
However, the wage bill increased (by 0.3 percent of GDP) beyond the budgeted amount,
reflecting the agreements reached by the government with employers and trade unions in the
context of the "Social Dialogue" held during the summer of 1996.

In 1997, Morocco’s external current account deficit contracted to 1.1 percent of GDP,
from 1.7 percent of GDP in 1996. Export volume picked up in 1997 (4.9 percent), driven in
particular by phosphates and its derivatives, textiles and pharmaceuticals. In the capital account,
direct foreign investment increased from US$0.4 billion to US$1.2 billion on the strength of an
improved climate for private sector activity and the sale of public enterprises to foreign investors.
These inflows enabled Morocco to raise its official reserves to US$4 billion (4.5 months of
imports of goods and nonfactor services) and, together with an active debt management policy, to
reduce the stock of its external debt as well as its average cost.

In recent years structural reforms have concentrated on improving the environment for
stronger private sector-led growth, and addressing weaknesses in the social sectors. Particular
emphasis was put on upgrading the judicial system, restructuring the financial sector, reorienting
education toward basic instruction and higher enrollment, and simplifying the regulatory
environment. The legal basis for private sector development was further strengthened by
amendments to the corporate laws and bankruptcy procedures.

Executive Board Assessment

Executive Directors commended the Moroccan authorities for the progress made over the
past two years in macroeconomic stabilization and in liberalizing the economy, despite the
economic and social impact of the recurring droughts. Directors noted that the strong budget
execution during 1996 and the 1996/97 fiscal year, and prudent monetary and exchange rate
policies, had contributed to lowering price inflation to levels prevailing in advanced economies,
strengthening the external position, rebuilding official reserves to comfortable levels, and
reducing the external debt. Nevertheless, Directors observed that Morocco’s growth record
in the 1990s had fallen short of expectations and remained below potential. Thus, Directors
emphasized the importance of accelerating the pace of structural reforms, including in the social
sphere, so as to strengthen social cohesion and further develop a qualified labor force.

Directors emphasized that fiscal consolidation should be given high priority in the short term
as well as over the medium term. They considered that the projected widening in the budget
deficit in 1997/98, due mostly to the salary increase that had been granted in 1996 as part of the
"Social Dialogue," was not consistent with the need for stronger fiscal consolidation.
They urged the authorities, starting with the 1998/99 budget, to strengthen their efforts to attain
fiscal consolidation over the medium term so as to raise savings and achieve higher
growth.Regulatory and tax administration reforms had produced strong results in the past fiscal
year. However, in the period ahead, Directors encouraged the authorities to consider various
expenditure measures, including steps to reduce Morocco’s government wage bill, civil
service reform, and replacing food subsidies with better targeted assistance. Directors also noted
that there was scope to increase revenues through indirect taxes, such as the value-added tax, as
suggested by recent Fund technical assistance missions.

Directors agreed that the use of the exchange rate as a nominal anchor had been effective
over the past few years in enforcing fiscal discipline, reducing inflation, and in encouraging the
private sector to make sustained efforts at raising its productivity and competitiveness. While a
few Directors saw merit in contemplating an early shift to a more flexible regime, most Directors
agreed with the authorities’ view that adopting a more flexible arrangement at this time
would be premature, as they felt that the necessary preconditions were not yet in place. Directors
argued that the authorities should continue to aim at improving competitiveness, including
through strengthened structural reforms and an increase in productivity. It was also emphasized
that increasing exchange rate flexibility would require that a solid alternative mechanism for
controlling inflation be in place. Directors generally agreed that the authorities should continue to
closely monitor developments and the appropriateness of the exchange rate regime, taking into
account the external position and the competitiveness of the economy.

Regarding structural reforms, Directors commended the authorities for the measures already
undertaken, and specifically for addressing rigidities in the regulatory environment, establishing
commercial courts, and simplifying judicial procedures. They also called for early action in
completing the process of price liberalization, and increasing labor market flexibility through the
adoption of a new labor code. This was seen as essential for reducing unemployment and
undertaking the large-scale reallocation of resources necessary for Moroccan enterprises to
enhance their competitiveness and reorient their production toward more dynamic markets. In
this respect, a few directors cautioned the authorities about minimum wage trends, which may
have negative employment effects.

Directors welcomed the measures taken to liberalize Morocco’s financial system and
strengthen the prudential control of the banking system, which appears to be well prepared to
play a more active role in the future. Directors encouraged the authorities to take further steps to
encourage greater competition, pointing out the opportunities provided in this regard by the
planned privatizations, as well as by the modernization of the national savings bank and the
postal checking system. They also advocated continued efforts aimed at improving financial
supervision.

Directors welcomed the authorities’ broad range of measures toward improving social
conditions in Morocco, in particular the pragmatic approaches to raise school enrollment and to
strengthen basic health services in rural areas. However, given the need to rapidly enhance
Morocco’s human capital to sustain productivity growth, Directors urged the authorities
toreform the education system and redouble their efforts at improving the skill mix and at raising
the literacy rate so as to obtain dramatic results in a relatively short period of time.

Directors welcomed Morocco’s efforts to improve the quality and timeliness of
economic and financial data, and to increase availability of these data to the broader public.
Directors encouraged the authorities to continue these efforts, particularly in light of their
intention to subscribe to the Special Data Dissemination Standard.

Morocco: Selected Economic Indicators

1994

1995

1996

1997

Domestic economy

In percent

Change in Real GDP

10.4

-7.0

12.0

-2.2

Nonagricultural
GDP

2.6

1.9

3.3

3.1

Unemployment
rate

20.3

22.9

18.1

16.6

Change in
consumer prices

5.1

6.1

3.0

1.0

External economy

In billions of U.S. dollars1

Exports
f.o.b.

5.5

6.9

6.9

6.9

Imports
f.o.b.

7.6

9.3

9.0

8.9

Private
transfers

2.1

2.2

2.4

2.1

Current account balance

-0.7

-1.5

-0.6

-0.4

In percent of GDP

-2.4

-4.6

-1.7

-1.1

Direct
investment

0.8

0.3

0.4

1.2

Public
borrowing, net

-0.3

-0.2

-0.3

-0.7

Capital account balance

1.3

0.9

0.8

0.6

Gross official
reserves

4.3

3.6

3.8

4.0

Financial variables

In percent of GDP1

Central government balance2

-3.9

-5.6

-3.7

-3.2

Central Government debt

82.4

83.1

75.4

78.5

of which
external

48.8

46.9

40.8

39.4

Debt service
ratio (in percent of exports of goods and nonfactor services)

1Under Article IV of the IMF's Articles of Agreement, the
IMF holds bilateral discussions with members, usually every year. A staff team visits the country,
collects economic and financial information, and discusses with officials the country's economic
developments and policies. On return to headquarters, the staff prepares a report, which forms the
basis for discussion by the Executive Board. At the conclusion of the discussion, the Managing
Director, as Chairman of the Board, summarizes the views of directors, and this summary is
transmitted to the country's authorities. In this PIN, the main features of the Board's discussion
are described.